JEFF PRESTRIDGE: The cost of public sector pensions is already mind-blowing. It beggars belief that Labour could protect them once again from a Budget tax raid...
Nothing splits opinion more in this country than gold-plated public sector pensions.
Those who are lucky enough to have one of these beauties of the pensions world can't quite believe their good fortune – a guaranteed retirement income for life, irrespective of the nation's economic circumstances.
Everyone else can't quite understand how such luxury pensions, ultimately funded by taxpayers, have survived in financially challenged Britain – especially when their own ability to save for retirement has been compromised by the repeated dumbing down and heavier taxation of private pensions over the past 30 years.
Indeed, rarely a week goes by without readers of Money Mail writing to me about unaffordable public sector pensions. Strangely, missives from public sector workers defending their right to such deluxe pensions are few and far between (maybe, they're just too embarrassed to brag about them).
Divisive
Sadly, this elephant in the room – the mind-blowing cost of public sector pensions – isn't going anywhere in a hurry. Indeed, given the way Labour is pandering to the big public sector unions, it will soon become the tyrannosaurus in the room.
Even though taxpayers support the retirement incomes of public sector workers (retired doctors, civil servants and teachers) to the tune of more than £2.4 billion a year, Labour's Chancellor Rachel Reeves isn't in the slightest bit interested.
In Rachel Reeves's mind, the pensions of public sector workers must be protected at any cost, irrespective of the parlous state of the country's finance
In her mind, the pensions of public sector workers must be protected at any cost, irrespective of the parlous state of the country's finances. Only the pensions of workers in the private sector, believes Reeves, should be mined for more tax.
All scary and deeply divisive, given that the value of gold-plated public sector pensions already guaranteed to workers is close to £5 trillion. A sum equivalent to £173,000 for every household in this country. Taxpayers (our sons and daughters, our grandchildren) will be responsible for funding a chunk of this astronomical sum in the years to come.
Incredulously, if leaks in recent days are correct, the Chancellor will announce a tax raid in next Wednesday's Budget that will widen this gulf between the generous pensions of public sector workers – such as pen-pushing 'work from home' civil servants – and those of most people who work in the cut and thrust of the private sector. It beggars belief. What financial fantasy world is Reeves living in?
The raid will come in the form of a tax charge on the contributions that employers are obliged to make into the pension funds of their staff. These are the top-up pension payments that employers make alongside our own contributions from our salary. Payments that make a real difference to the value of the pension pots that we eventually take into our retirement.
Currently, such employers' pension contributions are exempt from tax, but Reeves is planning to impose an annual £15 billion National Insurance tax charge on these payments. A sum that will raise a big chunk of the £35 billion of tax that Reeves believes she needs to put the country's finances on steadier ground before embarking on an economic growth agenda (I'll believe that when I see it).
Yet, extraordinarily, public sector employers – the likes of the NHS and a multitude of government departments – will be exempt from this tax raid. Reeves argues that to impose it on them (at a cost of £5 billion a year) would force public sector employers to make significant cuts to their budgets, already under extreme pressure.
If the tax raid on employers' pension contributions was implemented, former pensions minister Steve Webb says that 'private sector firms would... be less willing to offer generous pension packages'
Although it is right to say that the £15 billion tax on private employer contributions will not adversely impact the pension pots of workers in the short term, it will do so in the long term.
For example, some businesses will seek to mitigate the cost by making their pension offerings to workers less generous, making it more difficult for employees to build up funds sufficient to see them through retirement.
Others will look to keep a lid on workers' pay rises or trim their workforces (no job, no pension to fund).
Am I just being cynical? Not at all. It's a view that many leading pension experts share. Steve Webb, a former pensions minister and a partner at pensions consultancy Lane Clark & Peacock (LCP), says: 'If this policy was implemented, private sector firms would in the future be less willing to offer generous pension packages, thereby reducing the retirement incomes of today's workers.'
Tellingly, he adds: 'This [policy] would further increase the large gap between public sector workplace pensions and private sector pensions.'
Baroness Ros Altmann (also a former pensions minister) takes a similar view. 'If the public sector cannot cope with imposing National Insurance contributions on pensions, then that is a clear indication that all employers would also struggle.' Her conclusion? 'This change should not be imposed at all.'
Lost
This special treatment of public sector pensions by Reeves is not a one-off. Earlier speculation about the likely changes that she would make to pensions in next week's Budget centred around a radical overhaul of the tax relief that workers currently enjoy on contributions.
Instead of the current arrangement where workers get tax relief according to what rate of income tax they pay, she was minded to introduce a flat rate of 30 per cent.
A move that would have reduced the tax relief that higher and additional rate taxpayers (respectively 40 and 45 per cent) enjoy on pension contributions while boosting it for 20 per cent taxpayers.
Baroness Ros Altmann, also a former pensions minister, says the change 'should not be imposed at all'
Why did she rule it out? Not because of how complicated it would be to introduce (a minefield for employers and providers).
We're told it's because it would have penalised up to one million public sector workers who, through a mix of inflation-busting pay rises and a freezing of income tax bands, are now (or about to become) higher or additional rate taxpayers – and would have resultingly lost out.
Sadly, this protection of 'Rolls-Royce' public sector pensions will be a feature of Labour's tenure. Reeves will do nothing to upset the big unions that fund Labour and to whom she is in thrall.
Undermined
If we want this country to get back on its feet, we need a government brave enough to tackle the soaring cost of public sector pensions – not one that thinks the best way to raise funds is withdrawing winter fuel payments from hard-up pensioners.
That means a government which will be brave enough to end today's 'unfunded' public pension schemes – where workers' contributions are not invested in a stand-alone pot of cash but instead go towards paying the pensions of those members who have already retired. In my eyes, these arrangements are nothing other than giant Ponzi schemes.
In an ideal world, all public sector workers should also be moved into the same kind of pension that we in the private sector put money into. In other words, a pension fund (a defined contribution plan) where our retirement pot is primarily determined by stock markets. These are the only affordable way for all of us – employers, workers, and the public's purse – to save for retirement.
Public sector workers should no longer be allowed to contribute to schemes where their pensions are determined by a mix of years worked and average career earnings. These gold-plated pensions were once prevalent in the private sector but were undermined by another tax-raiding Labour chancellor 27 years ago (Gordon Brown) – and are now as rare as hens' teeth.
Yes, we really do need an urgent debate about the tyrannosaurus in the room.
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